2006-11-06 08:24 ET - Street Wire

by Will Purcell

Eric Friedland's Peregrine Diamonds Ltd. has the modelled diamond valuation for a 510-carat parcel taken from its DO-27 pipe. The numbers are lower than what the company found last year, but much higher than a 1994 bulk sample delivered. The modelled values span too wide a range to prove or kill the old Tli Kwi Cho project, and the subjective nature of the valuation process adds uncertainty. The result holds enough encouragement to warrant a much larger test of the pipe and Peregrine will press ahead with its plan to recover at least 3,000 carats early next year.

The numbers

Peregrine's consultant, WWW International Diamond Consultants Ltd. modelled the current diamond value at between $41 (U.S.) per carat and $62 (U.S.) per carat. Those figures are lower than Peregrine managed last year, but a brief downward blip in the rough diamond market accounts for the drop. WWW also gave Peregrine the average modelled values using 2005 prices, which were about 17 per cent above the current levels. Using last year's price regime, WWW arrived at a range that topped out at $73 (U.S.) per carat.

That value is in line with what Peregrine found a year ago, although the company used appraised prices in 2005. That parcel, which weighed less than 150 carats, received a valuation ranging between $53.21 (U.S.) per carat and $67.20 (U.S.) per carat. Those numbers suggest little change occurred with the somewhat larger parcel, but the 2005 figures are not directly comparable with the latest modelled numbers.

The implications

The value of a 510-carat parcel can vary considerably from the true average diamond value. WWW told Peregrine that the average prices assigned to the parcel could be up to 25 per cent below the true diamond value, or up to 40 per cent above the real value, and occasionally beyond those limits. Curiously, the WWW modelled average values span a smaller range than those confidence limits.

Diamond appraisals are subjective assessments that yield markedly different results with small parcels. Diamentaires offer conflicting assessments for individual diamonds, and their prices for a particular class of stone can vary significantly. The cumulative variations are usually minor with parcels weighing several thousands of carats, but they can be large with smaller batches of stones. For instance, the lowest of the four DO-27 appraisals in 2005 was 20 per cent below the most optimistic figure.

Modelled diamond values are typically conservative with smaller parcels and that can be the case with larger tests as well. WWW produced a modelled diamond value of $79 (U.S.) per carat for the diamonds in Diavik's A-154 South, based on 2000 prices and over 10,000 carats. WWW suggested the real value could vary anywhere from 7.5 per cent below to 15 per cent above the stated model value. When the pipe went into production in 2003, the first sales averaged about $90 (U.S.) per carat, about 14 per cent above the modelled feasibility value.

Aber's feasibility study noted that WWW had been "deliberately conservative in the modelling of the larger stones" at Diavik and it seems likely that WWW was at least as conservative when it prepared its estimates for Peregrine. Most of the diamond value comes from a small proportion of the total parcel, and Peregrine does not have enough large diamonds to say much about their value.

Peregrine had just a few large diamonds in 2005, but it had good luck with their quality. Four diamonds were larger than one carat and two were gems worth up to $1,200 (U.S.) per carat. The latest sample yielded several large diamonds, but their quality was generally poorer. The best stones in the parcel were smaller diamonds.

Larger parcels would smooth out those variations and provide a much sharper degree of confidence, but even big tests carry some uncertainty. A 3,000-carat parcel would yield a value with a 15-per-cent confidence range and a 10,000-carat parcel could carry an uncertainty range of nearly 10-per-cent. As a result, Peregrine will go after as many carats as it can get next year.

The limited data suggests the DO-27 diamonds are probably worth less than $80 (U.S.) per carat, but Peregrine thinks larger tests and improving diamond prices will help it top that mark over the next few years. Most diamentaires predict rough diamond prices will climb appreciably by 2011. WWW suggests a 20-per-cent jump is likely and that is one of the more conservative projections. If diamond prices rebound to the 2005 levels and Peregrine can remove some of the conservatism forced by its small parcel size, the DO-27 values could reach or top $80 (U.S.) per carat next year.

The economics

That will be critical to the project, as Peregrine's earlier work suggested a standalone mine at DO-27 would deliver a profit with rock valued at about $80 (U.S.) per tonne. Based on a grade projection of about one carat per tonne, the company would need a diamond value of $80 (U.S.) per carat. The company estimates the project becomes marginal as a standalone operation with rock value of about $70 (U.S.) per tonne, although it believes it could still mine the DO-27 kimberlite and truck it to an existing plant at Lac de Gras.

Although there are clear signs the grade of DO-27 is likely near one carat per tonne, the core zone of the pipe could have a higher content. Peregrine's tests produced some narrow zones with grades of about three carats per tonne, and some more substantial portions of the pipe topped two carats per tonne. Richer regions could bolster the project considerably, but Peregrine will have to minimize its operating and capital cost projections to make a mine work within a lower range of diamond values.

The company will consider washing the excavated kimberlite before sending it to a processing plant. Much of the mined material is just mud and removing that waste would easily double or triple the effective grade of the remaining rock. That would lower operating costs and allow Peregrine to use a smaller plant. The company could also replace the expensive X-ray technology in a plant with far cheaper grease tables. Some of the tiniest stones would slip through, but the capital cost savings could top $50-million per circuit.

Peregrine gained a penny on 26,400 shares Friday, closing at $1.91.